PDF_REV_Lecture_9_-_production_and_costs - Production and...

1 Production and Costs Objectives Types of producers & objective of producers Production in the short run – Total product vs. marginal product – Law of diminishing marginal returns – Costs: fixed cost, variable cost, total cost, marginal cost – Average costs: ATC, AFC and AVC – Why is the ATC and AVC U-shaped? Production in the long run: – Types of producers Firms – Corporations (stockholders) Entrepreneurs – Sole proprietor (one owner) – Partnerships (2 or more owners) > 70% of U.S. businesses Produce/sell almost 90% of goods/services in U.S.

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2 Goal of producers… Sales – Costs = Profit Total revenue - Total cost = Profit To maximize profit!! How do we calculate TR? Total revenue (TR) = total sales receipts so,… TR = P x Q A word about “costs” Economic costs = explicit costs + implicit costs – Explicit costs are costs that a businesses actually had to pay for; this is what an accountant sees and is therefore sometimes referred to as accounting costs – Implicit costs are the costs of resources used by the business but that have not necessarily been paid for (ex., depreciation, wages and or interest that could have been earned by owners of firm)

3 Example of accounting vs. economic costs Suppose the monthly costs of my doggie bakery business is as follows:- rent for shop = $1,000- utilities = $400- materials = $600 Since these are the costs my business pays for (i.e., I write checks for them), an accountant would include these as the cost of my business. But in order to have this business, I have to give up my job at WVC, where I currently earn $5,000 each month. In addition, to start this business, I use my own savings, and had to give up earning $1,000 month in interest. In economics, we would include these OPPORTUNITY COSTS as part of the cost of the business. Economic vs. accounting costs Accountants and economists differ in the way they count costs… rent for shop = $1,000 utilities = $400 materials = $600 Janis’ opportunity cost of her time = $5,000 Janis’ opportunity cost of her savings = $1,000 Accounting costs (i.e., explicit costs) Economic costs (i.e., explicit + implicit costs) Economic vs. accounting profits Because economic costs ≠ accounting costs… Economic profit ≠ accounting profit

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